[Federal Register: October 1, 2003 (Volume 68, Number 190)]
[Notices]
[Page 56656-56658]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc03-108]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48545; File No. S7-17-03]
Business Continuity Planning for Trading Markets
AGENCY: Securities and Exchange Commission.
ACTION: Policy statement; request for comment.
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SUMMARY: The Securities and Exchange Commission (Commission) is issuing
a Policy Statement setting forth its view that self-regulatory
organizations operating trading markets (SRO Markets) and electronic
communications networks (ECNs) should apply certain basic principles in
their business continuity planning within the specified implementation
timeframe. The Commission also requests comments on the Policy
Statement. After the comment period has closed, the Commission may re-
evaluate the Policy Statement in light of the comments received.
DATES: Effective Date: October 1, 2003. Comments must be received on or
before October 31, 2003.
ADDRESSES: All comments concerning the Policy Statement should be
submitted in triplicate to Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 5th Street, NW., Washington, DC 20549-0609.
Comments can be submitted electronically at the following E-mail address: rule-comments@sec.gov. All comment letters should refer to
File No. S7-17-03; this file number should be included on the subject
line if E-mail is used. To help us process and review your comments
more effectively, comments should be sent by one method--U.S. mail or
electronic mail only. All comments received will be available for
public inspection and copying in the Commission's Public Reference
Room, 450 5th Street, NW., Washington, DC 20549. Electronically
submitted comment letters will be posted on the Commission's Internet
Web site (http://www.sec.gov). The Commission does not edit personal
identifying information, such as names
[[Page 56657]]
or e-mail addresses from electronic submissions. Submit only the
information you wish to make publicly available.
FOR FURTHER INFORMATION CONTACT: Robert Colby, Deputy Director (202)
942-0094; David Shillman, Associate Director, (202) 942-0072; or Peter
Chepucavage, Attorney Fellow, (202) 942-0163, Division of Market
Regulation, Securities and Exchange Commission, 450 5th Street, NW.,
Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION:
I. Background
A critical ``lesson learned'' from the events of September 11, 2001
is the need for more rigorous business continuity planning in the
financial sector to address problems of wider geographic scope and
longer duration than those previously addressed. These events made
clear the possibility of a large-scale regional disaster, resulting in
a broad consensus in the financial community that business continuity
planning needs to adapt to plan for events of wider scope and, in
general, become more robust and resilient. Since the September 11
attacks, the U.S. securities markets and market participants have taken
significant steps toward this goal by demonstrably improving the
robustness of their business continuity plans.
The Commission and other financial regulators also have been
devoting substantial resources to efforts designed to strengthen the
resilience of the financial sector. For example, the Commission,
together with the Board of Governors of the Federal Reserve System and
the Office of the Comptroller of the Currency, recently published an
Interagency Paper on Sound Practices to Strengthen the Resilience of
the U.S. Financial System (Interagency Paper),\1\ that identified
``sound practices'' relating to business continuity planning for
certain key market participants. The goal of this project was to
minimize the immediate systemic effects of a wide-scale disruption by
assuring that the key payment and settlement systems could resume
operation promptly following a wide-scale disaster, and major
participants in those systems could recover sufficiently to complete
pending transactions. In this way, market participants unaffected by
the disaster could continue to operate with minimal disruption and,
when those impacted by the event were in a position to resume
operations, the critical infrastructure would be available for them to
do so. The sound practices identified by the Interagency Paper include:
(1) Intraday resumption or recovery goals; (2) maintenance of
sufficient geographically dispersed resources to meet those goals; and
(3) routine testing of business continuity arrangements. The
Interagency Paper, however, focuses only on the key payment and
settlement systems, and does not address the resilience of the trading
markets.
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\1\ Interagency Paper on Sound Practices to Strengthen the
Resilience of the U.S. Financial System, SEC Release No. 34-47638
(April 7, 2003).
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Separately, Commission staff has been reviewing, on an ongoing
basis, the efforts of the organized securities markets--the exchanges,
Nasdaq, and ECNs--to strengthen their resilience in the post-September
11 environment. To date, these markets have taken a variety of steps to
improve their physical security, information system protections, and
business continuity capabilities. For example, the New York Stock
Exchange (NYSE) has taken substantial measures to physically secure its
Wall Street trading floor, and has established an off-site alternative
trading floor that could be activated on a next-day basis if the NYSE's
Wall Street trading floor was rendered inaccessible. Commission staff
continues to work with the organized markets to further increase the
robustness of their individual plans. In addition, Commission staff has
been exploring with the markets the possibility of mutual back-up
arrangements. For example, at the staff's urging, the NYSE and Nasdaq
have agreed to serve as back-up trading platforms for each other's
securities if a catastrophic event forced an extended closure of one
market.
Earlier this year, the Government Accounting Office (GAO) issued a
Report \2\ recommending, among other things, that the Commission work
with the securities industry to develop goals and strategies to resume
trading in securities as rapidly as appropriate in the event of future
disruptions, and determine sound business continuity practices that
organizations would need to meet these goals. The Commission agreed
with the GAO that more needs to be done to prepare the securities
markets for the resumption of trading in the event of a crisis, and
indicated an intent to consider identifying a time frame against which
markets should plan to resume trading following a wide-scale regional
disaster.\3\ By establishing a specific resumption goal, the Commission
would provide the securities markets with a consistent benchmark to use
in developing more resilient business continuity plans.
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\2\ Report to Congressional Requesters of the United States
General Accounting Office entitled Potential Terrorist Attacks:
Additional Actions Would Better Prepare Critical Financial Market
Participants (February 12, 2003).
\3\ See Testimony of Robert L.D. Colby, Deputy Director,
Division of Market Regulation, U.S. Securities and Exchange
Commission, at Hearing Before the House Subcommittee on Capital
Markets, Insurance, and Government Sponsored Enterprises, Committee
on Financial Services, entitled Recovery and Renewal: Protecting the
Capital Markets Against Terrorism Post 9/11 (February 12, 2003).
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II. Policy Statement
In view of the importance of the trading markets to the U.S.
financial system, the Commission believes it appropriate \4\ for the
SRO Markets and ECNs to prepare for the resumption of trading in the
event of a ``wide-scale disruption.''\5\ Among other things, the
trading markets provide the means for financial institutions to adjust
their cash and securities positions, and those of their customers, in
order to effectively manage liquidity, market, and other risks. These
markets also are critical to the capital raising process and for
funding daily business operations. With over half of all U.S.
households invested in the capital markets, the mechanisms for managing
and valuing that wealth--the trading markets--must be highly-resilient.
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\4\ Among other things, the Commission believes that the Policy
Statement is consistent with and in furtherance of sections 2 and
11A (a) (1) (B) and (C) of the Securities Exchange Act of 1934.
\5\ The term ``wide-scale disruption'' has the same meaning here
as in the Interagency Paper. Specifically, a ``wide-scale
disruption'' is an event that causes a severe disruption or
destruction of transportation, telecommunications, power, or other
critical infrastructure components across a metropolitan or other
geographic area and the adjacent communities that are economically
integrated with it; or that results in a wide-scale evacuation or
inaccessibility of the population within normal commuting range of
the disruption's origin.
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That said, while there is little doubt that the trading markets
collectively are critical to the U.S. financial system, the Commission
is of the view that, individually, the markets present a lesser degree
of systemic vulnerability than the key clearance and settlement
utilities. For one, trading activity is relatively fungible across
markets. In today's diverse U.S. national market system, very few
securities are traded only in one market. As a result, the Commission
believes that, were any single securities market to become
incapacitated, trading could be shifted to one or more of the remaining
markets. Accordingly, the business continuity planning principles for
individual trading markets, set forth below, are somewhat less
stringent than the sound
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practices for the key payment and settlement systems outlined in the
Interagency Paper.
Specifically, the Commission expects each SRO Market and ECN to
apply the following principles in its business continuity planning:
[sbull] Each SRO Market and ECN should have a business continuity
plan that anticipates the resumption of trading, in the securities
traded by that market, no later than the next business day following a
wide-scale disruption.\6\ The resilience of the SRO Market or ECN
prescribed by such plans should reflect the extent of alternative
trading venues for the securities traded by that market, including the
number of sole listings on the market, the market share of the market,
and the number of sole members or subscribers of the market. Business
continuity plans may focus on strengthening the SRO Market's or ECN's
own resilience, on backup arrangements with other markets, or both.
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\6\ Consistent with the approach taken in the Interagency Paper,
the next-day resumption objective should provide a concrete goal to
plan for and test against. This should not be regarded as a hard and
fast deadline that must be met in every emergency situation. Various
external factors, such as time of day, scope of disruption, and
status of critical infrastructure--particularly telecommunications--
can affect actual recovery times.
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[sbull] Assuring resumption of trading activities by a market by
the next business day generally requires geographic diversity between
primary and backup sites.\7\ To be fully resilient, backup sites should
not rely on the same infrastructure components (e.g., transportation,
telecommunications, water supply, and electric power) used by the
primary site, and the operation of such sites should not be impaired by
a wide-scale evacuation at or the inaccessibility of staff that service
the primary site.
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\7\ As in the Interagency Paper, however, the Commission does
not believe it is necessary or appropriate to prescribe specific
mileage requirements for geographically-dispersed backup sites.
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[sbull] The SRO Markets also should assure the full resilience of
important shared information systems, such as the consolidated market
data stream generated for the equity and options markets. The market
data collection and dissemination systems, for example, are critical to
the functioning of the trading markets because of their reliance on
accurate and current pricing information.
[sbull] The effectiveness of back-up arrangements in recovering
from a wide-scale disruption should be confirmed through testing.
[sbull] Each SRO Market and ECN should implement plans reflecting
these principles as soon as practicable and strive to do so no later
than the end of 2004.
The Commission staff intends to engage in an ongoing and
individualized dialogue with each SRO Market and ECN to discuss
application of these principles in a manner most appropriate for the
particular trading market.
The Commission believes every reasonable effort should be made to
assure the prompt and smooth resumption of trading following a wide-
scale disruption, and that application of the principles described
above is a critical step in achieving that goal. Nevertheless, the
Commission notes that, depending on the facts and circumstances of a
given event, it may be prudent to defer the reopening of a particular
market or markets even if, from a technical standpoint, the resumption
of trading is possible. In the case of a disruption of the securities
markets, the Commission has a fundamental regulatory interest in
assuring the prompt--yet smooth--resumption of trading. Deciding when
to reopen the markets will involve an assessment of the operational
capabilities of the markets and major market participants, as well as
the clearance and settlement system. In a given situation, difficult
judgments may be required to strike the appropriate balance between the
desire to resume trading as soon as possible, and the practical
necessity of waiting long enough to minimize the risk that, when
trading resumes, it will be of inferior quality or interrupted by
further problems.
Finally, the Commission believes that the establishment of a next-
business day resumption goal for the SRO Markets and ECNs should serve
as a useful resumption benchmark for securities firms as well. The
decision by a broker-dealer to risk capital or provide brokerage
services on an ongoing basis is, in essence, a matter of business
judgment. Given the competitive nature of the securities business,
however, the Commission expects there to be incentives for broker-
dealers to be prepared to participate in the markets following a wide-
scale disruption as soon as the markets' trading facilities become
available.
III. Conclusion
The Commission believes it important for the SRO Markets and ECNs
to take concrete steps to strengthen their resilience to address the
continuing, serious risks to the U.S. financial system posed by the
post-September 11 environment. To date, the trading markets have made
significant progress in increasing the robustness of their business
continuity plans. By applying the principles outlined in this Policy
Statement, the Commission believes the SRO Markets and ECNs will better
assure their own resilience and that of the U.S. financial system. In
so doing, they will be promoting one of the paramount objectives of the
U.S. securities laws--the maintenance of fair, stable, and orderly
markets.
Dated: September 25, 2003.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24863 Filed 9-30-03; 8:45 am]
BILLING CODE 8010-01-P